Singapore’s high-grade future for iron ore

The Singapore Exchange signalled the headwinds for WA’s lower-grade iron ore producers were not about to abate any time soon as it announced plans for a new high-grade iron ore futures contract.

In addition to the benchmark contract for 62 per cent iron ore content and the low-grade 58 per cent contract, Singapore Exchange head of commodities William Chin said that a contract for 65 per cent ore could be in place by year-end.

Demand for higher grade ore that is cleaner and more efficient has soared over the past two years amid environmental, pollution-related production clampdowns in China.

“Clients are asking for a hedging tool to better manage the increasingly volatile spread in grade differentials,” Mr Chin said.

The iron ore market has become more fragmented over the past two years, with more demand for higher-quality material and wider spreads between grades by content and purity that favour Brazilian producers even over the likes of Rio Tinto and BHP.

A contract for 65 per cent ore would allow investors and users to hedge their exposure, as well as trade the spread.

The SGX AsiaClear contract for benchmark 62 per cent ore was at $US69.72 a tonne, slightly down on the year, and spot ore with 65 per cent content was at $US95.85 on Thursday, up more than 7 per cent in 2018.

The high-grade premium of $US26 is up from $US6 when prices bottomed in 2016.

The gap between the two stands at more than $US26, up from about $US6 at the start of 2016.